Tag: small business owner

Self-Employed in the Gig Economy? Watch Out for This – Solopreneur Retirement Funds 2019

Solopreneur Retirement Funds 2019

Whether you call yourself a solopreneur, self-employed, or freelancer, you’re most likely a hard-working individual with the best boss ever – You!?However, as sole-decision makers, we solopreneurs often suffer from a lack of objective feedback. This can be especially damaging when it comes to taking care of our own basic personal needs.

If you want your business to flourish, you need to take care of yourself first

Managing all aspects of a business, from marketing to operations, requires even the most disciplined among us to push beyond our limitations. It’s easy for us to ignore our own welfare. When you are your business, you have to wear many hats. But why do we so often forget to wear the most important one – our HR hat? If you want your business to flourish, you need to take of yourself first. You need to understand your options for solopreneur retirement funds. This topic is especially critical when we consider the future we are entering.

The gig economy is a different playing field

Today, 36% of American workers are gig economy workers. By 2020, that figure is expected to increase to 40%. With 53% of companies now also opting for more flexible workers, this trend will only increase. What this means is an increase in both completely independent workers and contract workers with zero benefits.

In the gig economy, there are no benefits

In the gig economy, there are no benefits, no guarantees of a minimum wage, no guarantees of a steady paycheck, no company-sponsored retirement savings plans or saving into social security. And this is a reality that solopreneurs must come to terms with and manage, on top of everything else.

If this is the future we face, how can we take care of our own welfare while scaling our business?

Related: Ten Quick Ways to Make Money While Helping the Planet

Paying yourself is more than simply reinvesting

In the gig economy, if you don?t invest in your own retirement, who will? You can bet 100% that your business will win but you still have to hedge. Risk mitigation is what keeps events from becoming ruinous. Remember that you are not your company. If your business fails, you will still need to be healthy and solvent as you seek your next adventure. Having solopreneur retirement funds to fall back on can make the difference between whether this is possible or not.

You can bet 100% that your business will win but you still have to hedge.

We know that it can be confusing to figure out the different solopreneur retirement funds options out there. With Solo 401(k), Roth Solo 401(k), SEP IRA, Roth IRA, Self-Directed IRA and Health Savings Accounts, how do you know what is right for you??

Well Wallet cares about this topic because we are you! We are entrepreneurs and freelancers. too! So we have done the research for you. In Part 1 of our Solopreneur Retirement Fund Series, we’ll cover two retirement vehicles you should look at:? the Solo(k) and the Roth Solo(k).

The Solo 401(k)

A Solo(k), (also known as a Self Employed 401(k), Individual 401(k) or i401K,) is a plan for business owners (with no employees) and their spouses. When you have a Solo(k), you get to play two roles: ?that of the employer and that of the employee.

Bonus: this means that you get to make contributions through both of those roles.

When you have a Solo(k), you get to play two roles: ?that of the employer and that of the employee.

You as the Employer:??You are the employer and can contribute up to 25% of your net self-employment income, up to a maximum of $56,000, which is your business income minus half your self-employment tax. These pre-tax contributions* lower your taxable income and help cut your tax bill.

You as the Employee:? You are the employee and are allowed to contribute pre-taxed* earned income up to the annual contribution limit. ?For 2019, you can contribute up to $19,000 as an employee even if $19,000 represents 100% of your self-employed earnings for the year! (If you?re over 50, you get an additional $6,000 added to your contribution limits for a total of $25,000.)

Bottom line:?As both employer and employee, you can contribute up to $56,000 for the 2019 tax year ($62,000 if age 50 or older). If your gig is taking off this year, this is a fantastic solopreneur retirement fund opportunity.

*Pre-tax contributions and their earnings will be taxed as regular income when they are withdrawn in retirement. If you want to avoid being taxed when withdrawing contributions and their earnings, you might want to consider adding a Roth Solo(k).

The Roth Solo(k)

Another option is the Roth Solo 401(k). While Roth contributions are taxed, you will not be taxed on the contributions or their earnings when you withdraw them after the age of 59 ?.

Note: this assumes you have had the account open for at least 5 years.

Roth contributions are taxed before, not after

So, while Roth contributions don?t give you a tax break now, you can withdraw the money (and the gain on that money) tax-free in retirement. Depending upon whether or not you think you will be in a higher or lower tax bracket by that age, this can give you quite a break at the end of the road.

You can only contribute up to $19,000 of employee contributions annually to the Roth Solo(k). Like the Solo(k), you get an additional $6,000 added to your contribution limits for a total of $25,000 if you are over 50.

There is no employer contribution with the Roth Solo(k)

Related:? Forget Retirement – Here’s Why You Need to Start Investing Now

Top Questions to Ask When Setting up a Solo(k)

To set up a Solo 401(k), you need to complete an application to open an account with a financial institution. Solo(k)s are offered by the largest retail brokers, including Vanguard, Schwab, and Fidelity. You?ll definitely want to shop around a bit and compare plans at different institutions. Here are some important questions you’ll want to ask while shopping for your Solo 401(k):

1) What investment options should I choose?

Once you open the account, you then need to pick the investments in the account.?Make sure that your plan provider offers total stock market index funds that are low cost (low expense ratio), have no sales loads and have commission-free trades into these funds.

Why you should choose passively managed index funds

  • Low Cost

If you hire someone to manage your investments for you, that person tries to beat the market by picking and choosing investments. He or she performs an in-depth analysis of many investments in an attempt to outperform the market index, like the S&P 500.

Hiring someone to actively manage your funds takes a big cut out of your return.

Hiring someone to actively manage your funds takes a big cut out of your return. There?s the expense ratio, which is a recurring fee the fund deducts from your account. There are sales loads, which you pay when your manager buys your funds. There can be commissions and a myriad of other fees that investors just aren?t aware of when they hire an advisor to pick their funds or invest in actively managed funds.

For the 15-year period of April 1, 2001 through March 31, 2016, only 29% of actively-managed U.S. large company funds were able to beat the S&P 500 Index. – The Balance

You would hope that after all of these fees are deducted, the performance of your funds would beat the market, right? Unfortunately, the opposite is often true. Actively managed funds rarely beat the market over time, and they are more costly. ?But what if there was a simple and cheap way to passively own a small piece of the entire stock market instead of paying someone to try and ?guess? which stocks might beat the market? Well, there is. They are called index funds.

  • Broad diversification

An index fund?tries to mimic the returns of an index it follows (such as the S&P 500) by purchasing all (or almost all) of the holdings in the index. Thus, they are referred to as ?passively managed? and are therefore cheaper to buy. Instead of paying someone to try and pick a winner that beats the market for you, you are actually just buying the whole market.

  • Tax efficiency

Another benefit of index funds is that they are tax efficient. Index funds have extremely low turnover while actively-managed funds often have high turnover ratios. Higher turnover = higher taxes. When funds have more buying and selling activity (aka turnover), some securities will probably sell at a higher price than they were purchased. That means you’ll be paying capital gains taxes more frequently.?

So, to recap. Index funds offer:

  • low cost
  • broad diversification
  • tax efficiency
  • set and forget simplicity (no day trading)
  • superior performance

These index funds have broad coverage and very low expense ratios

(As of April 2019)

Vanguard VTI Vanguard VTSMX Vanguard VTSAX Schwab SWTSX Fidelity FZROX

* Initial minimum investments into retirement accounts such as the Fidelity Simplified Employee Pension-IRA, Keogh, Self-Employed 401(k), and Non-Fidelity Prototype Retirement accounts are $500 or higher.?

**NEW index fund from Fidelity – with zero expense ratio. They are the first to get rid of the expense ratio for their total market index.

*** No loads or trading fees when you purchase from the fund?s platform. For example, if you choose a Fidelity Total Market index fund and trade through your account at Fidelity, you will not be charged a commission. However, if you trade that same Fidelity index fund through an account at Schwab, you will be charged a trade fee. Tip: open an account with the broker that has the funds you want.

Why We Like Vanguard (No, we aren’t paid to say this.)

We like Vanguard because their Total Stock Market Index fund has the most companies (about 3,600). That’s almost every publicly traded company in the U.S. They also have some of the lowest expense ratios (0.04%) and no trading fees. That means you can invest every single month without paying commissions.?Also, Vanguard pioneered the index investing movement and operates its business at cost. Vanguard has no outside owners. If you own a Vanguard fund, you own part of Vanguard. We think this keeps the incentives in the right place.?

Bonus (this applies to any broker): you can split your contributions between total stock market funds and an investment strategy YOU believe in. (For the folks at Well Wallet, that would be sustainable investing.)

Related:? 4 Ways to Make Real Money with Sustainable Investing

2) Loans:? Can you take loans from the plan?

Federal law allows workers to borrow up to 50% of their account balance, up to a maximum of $50,000.?But be very careful with loans from retirement accounts. Some 401(k) plans ban contribution for six months after a loan. Also, remember that you will be paying both the loan payment and the interest on that loan with post-tax dollars. Finally, a loan from your 401(k) takes your earnings out of the market. While loans can be helpful during times of crisis, make sure you understand the rules regarding them.

3) Rollovers: ?Are they allowed into and out of the plan?

You may find yourself in a position later where you are working for an employer again. In this case, you may want to roll your Solo 401(k) into your employer?s Traditional 401(k) in order to take advantage of employer matching if their plan allows it. You may also want to roll an existing 401(k) into a Solo 401(k) or roll your Solo 401(k) into an IRA or visa-versa. For these reasons, find out if your plan can be structured to accept rollovers.

4) Does the plan offer a Roth option?

As mentioned above, a Roth option accepts taxed employee contributions. This means that you can invest all or part of the $19,000 and you will not be taxed on the contributions or their earnings if you withdraw them after the age of 59 ? (and if you’ve had the account open for 5 years.)

Note: ?Employee contributions must be made by the end of the calendar year but you can make Employer contributions until the tax-filing deadline.

Tip: Be sure to open your Solo 401(k) account before December 31st, 2019 to be able to make employee contributions and lower your taxes for the tax year 2019.

Rules about Withdrawing funds from a Solo 401(k)

  • If you make withdrawals before you are 59? they may be subject to a 10% early withdrawal penalty in addition to any applicable taxes. This is a big deal. Don’t withdraw your funds early. If you have to, take out a loan and pay the interest back to yourself before liquidating the account.?
  • You must take required minimum distributions from Solo 401(k)s starting at age 70?.
  • You can roll your Solo 401(k) assets into IRAs or an employer?s 401(k) (if it is allowed by that employer?s 401(k).

Stay tuned for the next issue of The Solopreneur Retirement Fund Series where we will continue our discussion on more Solopreneur Retirement Funds options such as SEP, SEP IRAs, Roth IRAs, Self-Directed IRAs, and HSAs (Health Savings Accounts.)

Related:? Governments and Emojis Can’t Solve World Problems – We Can!

More from our lawyers: Well Wallet, PBC (aka WellWallet) is an informational platform for personal finance, and unless specifically stated otherwise, the content is provided to you without charge. WellWallet is not a financial planner, broker, or tax advisor. We cannot provide any advice for your specific financial situation. Our goal is to help you understand how to better manage your finances and how your finances affect your life goals, but we can never make any guarantees about your financial future (or present). The material here is meant for informational purposes only. ?It should not be considered legal or financial advice. See our Terms & Conditions for more information.

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The Truth About Retirement In The Gig Economy

Years Of Roller Coaster Cash Flow…

Thinking about money gives me heart palpitations. As a small business owner in a creative field, my focus has always been squarely on my work and my clients. I send invoices off at lightening speed so I can get back to the real work.

Small business owners, freelancers, gig economy worker bees: we have all purchased tickets to ride a financial roller coaster. Money comes and goes in unpredictable waves. It?s easy to think things will always be sunny when you?re riding high on cash flow. But I?ve had enough down cycles over the past 15 years to know I can?t get comfortable.

The elephant in the room for me is retirement. For years I reinvested profits into the business, figuring I could save for retirement at some future date. When my industry, along with every other, took a nosedive in 2008, I was forced to dip into my savings. Fast forward 9 years and I?ve managed to make the business profitable again, purchase a nice apartment and maintain a comfortable standard of living.

But I have saved little for retirement.

Looking back, I wish I’d set up an automatic withdrawal and investment account, even if the contributions would’ve been small. Compound interest would have been nice.

“Compound interest is the eight wonder of the world. He who understands it, earns it…..he who doesn’t….pays it. Compound interest is the most powerful force in the universe.” -Albert Einstein

… Means Playing Catch-up For Retirement

I am now having to play catch up and it doesn’t look pretty. A peek at a retirement calculator confirmed my fears.??The good news is, I’m putting my retirement decisions on a fast track.?A few years ago I opened an IRA account and because I cannot contribute more than $5,500 per year, I decided to invest aggressively by purchasing mostly technology stocks. So far that account is up a whopping 30%. It isn’t a lot of money and that’s the only reason I feel safe taking such a risk.

Next, I opened a SEP account through my business (something I should have done ages ago) and opted for a more balanced portfolio made up of low cost?ETFs. I am contributing the maximum allowable each year, which in my case is about $20,000. These are pre-tax dollars and I am counting on that compounding interest to help reach my retirement goals.?This plan has certainly curtailed my bottom line, which means I’ve had to cut back on my expensive sushi and sake habit. But I feel safer knowing the money is working for me.

When You’re Building A Business, It’s Hard To Save

When you’re busy building a business from the grown up retirement is the last thing on your mind. As free agents it is hard enough to keep track of all the tax liabilities, let alone a retirement account. It seems almost trivial. But time flies when you’re having fun and before you know it, your friend who’s been doing the corporate grind for 15 years suddenly has a nice nest egg and you have…..nothing.? I’ve had to re-calibrate the way I think about spending.

I used to pay my business expenses, taxes and living expenses, in that order. Whatever was left over was reinvested into the business. Now, after paying business expenses and taxes, I pay my retirement accounts. There is less money to reinvest in the business and less money for living expenses.

Predictably, this has made me a more careful and mindful consumer. If there is a piece of equipment that needs upgrading, I will purchase used instead of new. I have lowered my overhead by consolidating staff while taking on more work myself. I cook more meals at home and Trader Joe’s is my new Whole Foods. Living a bit more frugally has proven to be less stressful than I anticipated.

What Finally Helped

The anxiety of planning for retirement largely came from the worry that I might not be able to keep up with monthly or yearly contributions in a consistent manner. So I simply didn’t deal with it. What finally worked for me was?automating my retirement contributions. I made them realistic. I made them a fixed line item, like my monthly mortgage. Once I did that, I had no choice but to pay into the accounts.

Practically everyone is familiar with Warren Buffet’s ‘pay yourself first’ principle. When you are running a business, simply keeping it afloat seems like a tremendous accomplishment. Moreover, many of us believe our small businesses will in fact be part of our retirement plan. Unfortunately there seem to be fewer guarantees about the long term viability of any given small business these days. Industries, especially creative ones, are changing so rapidly, it is impossible to predict the value of an asset 20 years from now.

Although I’m more than a little late to the party, saving for retirement using traditional investment vehicles has paradoxically forced me to streamline my business and perhaps better prepare it for that uncertain future.

Darla Roost is a pen name for a gig economy creative professional thriving in New York City. Her dream is to share her stories and create a place where people can share theirs, too.?Photo by?Bonnie Kittle

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5 Simple Tips to Save Money on Your Daily Business Expenses

To succeed in today’s marketplace, you have to make every dollar count. One of the best ways to do that is to look at your daily business expenses. Ask yourself if you?ve done everything possible to keep those expenses as low as possible, while not sacrificing quality, employee retention, and your sanity. Consider these five cost-saving tips when you evaluate how well you are spending your dollars.

Building and Maintenance

In most companies, the top operating expenses are payroll and facilities. How well are you using the space you have? Would it be more cost effective to move or is it cheaper to stay where you are? If you own the building and aren?t using or need all the space, you could rent out part of the space to offset the cost of the mortgage and utilities.

Take a look at how energy-efficient your building and space is and how much maintenance is necessary. You can reduce the cost of space by either finding a cheaper, more energy-efficient space, or spreading out the maintenance among some of your staffed employees who handle cleaning or maintenance.


Payroll is a tough expense to address. You want to keep your employees happy and pay them what they are worth, but high payroll costs can eat into the budget quickly and deeply. The first area to look at is overtime. If employees are consistently working overtime hours, it may be time to either add staff permanently or temporarily. Do the analysis to determine whether it is more efficient to add staff or pay the overtime.

As seasoned employees leave, try to replace them with less experienced but highly trainable replacements at a lower salary. You may be able to reduce salary increases in lieu of stock options, paid time off, or other benefits that may not affect the bottom line. For example, employees may be just as happy with less pay if they?re allowed to work from home two days a week or trade in their suits for t-shirts and jeans.


Gone are the days when everyone needed an onsite server and to pay for expensive software packages. Now, the cloud has proven more reliable and easier to manage, and cloud space is dirt cheap compared to maintaining and upgrading services. Many software companies have moved away from selling software packages that have to be manually upgraded periodically. A lot of software released now is cloud-based, so that the experts can assure their customers have the most current version.

Best of all, you may be able to use this software from anywhere, which means you can work as easily from home as at the office, or if something happens to your office building, your business isn?t compromised. You can just shift locations elsewhere.


Keep accounting costs at bay. This will ensure you meet deadlines and can avoid paying penalties and interest and take advantage of vendor discounts. Additionally, look at what it costs you to have an accountant do your bookkeeping. You may find it less costly to treat one of your reliable employees to an online accounting degree, and then move the accounting back in-house.

Price Shop

Never assume the rates you were quoted last year for things like cellphones, insurance, trash service, or landscaping are still the best rates today. Make it a practice to at least once a year shop around for a better price. Remember to compare similar services in your analysis or you may end up paying more.

Keeping your day-to-day operating costs low means analyzing each income statement line item and asking if that is the best you can do and still maintain a healthy work environment that promotes growth. Start with these five tips, but do not stop there. See what suggestions your employees have as well. They may surprise you.

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